Roaring Back : Key U.S. Industries Are on the Rebound
That sound you hear is the hum of factory machinery, the rattle of auto assembly lines, the whine of the drilling rig. It’s the sound of American manufacturing slowly coming back to life as the economic recovery huffs and puffs along.
While the revival may be neither universal nor readily apparent in depressed Southern California, critical sectors of American industry are seeing increasing demand for their products and services.
On the Gulf of Mexico, a flotilla of U.S. drilling ships plies the oily waves. On the tundra of Siberia, a new fleet of U.S.-made bulldozers soon will be grading the frozen ground. In the auto showrooms of suburbia, Americans are rediscovering Detroit’s best.
The phenomenon--particularly notable in the case of American-made cars, heavy equipment and computers--represents something of a historical anomaly, analysts say. In the past, consumer purchasing pulled the nation out of recession, but this recovery is characterized by rising spending for capital goods.
“The industrial side of the economy is doing better than the consumer side of the economy,” said Tobias M. Levkovich, industry analyst at Smith Barney Shearson in New York.
“Consumers are tapped out,” he said.
Much of the expansion is in home markets, not overseas. European and Asian nations continue to struggle with their own recessions.
Overall, the American recovery remains sluggish. And it is an overstatement, of course, to say that all of U.S. industry is back at work.
One measure of that is the July report of orders to U.S. factories, which dropped2.1%. It was the worst decline since December, 1991, and the fifth drop in seven months, according to a government announcement last week. Orders for transportation equipment were off 16.7%.
But there are signs of life, notwithstanding the industry-wide data. Excluding the transportation sector, orders rose 0.2% in July--the second increase in two months. Demand for industrial equipment and machinery increased 4.2% and orders for electronic equipment were up 1.6%.
Moreover, certain corporations are seeing some of the most profitable quarters ever as they benefit--finally--from cost-cutting, better prices, a renewed technological edge, new product lines and rising demand for their products.
The firms on the rebound include farm machinery maker Deere & Co., auto maker Chrysler Corp. and chip maker Intel Corp.
Autos
When Chrysler rolls out its stylish Neon subcompact Tuesday at the Frankfurt Auto Show in Germany, it will be making a statement of international proportions. Developed in just 31 months at a cost of $1.3 billion, the Neon promises to be an American oddity--a small car that makes money.
Indeed, after several years of torrential losses, General Motors, Ford and Chrysler all have made substantial progress toward transforming themselves into formidable competitors on the world market.
“They have figured out how to run their business in different but better ways,” said David Cole, director of the University of Michigan’s Office for the Study of Automotive Transportation.
By doing so, the Big Three are regaining market share. They now command 74.7% of the U.S. car and truck market, up from 70.5% in 1991. Meanwhile, Japanese auto makers are in retreat, hurt by a strong yen and recession at home.
Even with the slack economy, new vehicle sales have risen 7.7% so far this year. That translated into combined second-quarter profits of $2.35 billion for the Detroit auto makers.
The turnaround has come after several years of wrenching change. The Big Three posted combined operating losses of more than $10 billion for 1990 through 1992.
With the pain has come gain, however. The auto makers continue to cut costs across the board. Lean production operations and team building techniques are common on factory floors. Productivity and quality control improvements abound. At the same time, more attention is being paid to what car buyers want. “Customer service” has become an industry mantra.
The greatest strides are apparent at Chrysler. Saved from bankruptcy by a federal bailout in 1980, Chrysler was on the brink again as that decade came to a close.
Its traditional customers--blue-collar workers and retirees--were being priced out of the market. Chrysler decided it had to build cars with broader appeal and build them cheaper and faster.
Then-chairman Lee Iacocca undertook a major restructuring in 1989, long before his rivals would take similar steps. He closed several assembly plants, laid off 11,000 workers and went on a cost-cutting rampage.
Scrapping its old hierarchy, Chrysler created interdisciplinary groups to be involved in a product’s planning, design, manufacturing and marketing from beginning to end. This team approach is credited with helping to reduce the development time and cost of Chrysler’s highly acclaimed LH mid-sized sedans and Dodge Ram pickup trucks.
Union workers at the Belvidere, Ill., plant were asked for suggestions about how to make production of the new models easier and more efficient. More than 4,000 ideas flowed in, and many of them were adopted.
As a result, the Neon is lighter and simpler to build, though it has more features than its predecessors, the Plymouth Sundance and Dodge Shadow. The Neon uses 52% fewer fasteners than those cars and draws from 37% fewer suppliers.
The short development cycle virtually ensures that the car will be profitable. By contrast, GM’s Saturn took seven years and $5 billion to develop. Despite its popularity, the Saturn line still has not made money after three years on the market.
Even without the Neon Chrysler is riding high, with vehicle sales up 26% this year. It dominates the minivan field and its Jeep Cherokee is a major player in the sport-utility category.
Chrysler still must prove that the quality of its much-ballyhooed new products can equal that of its competitors’ products. Chairman Robert Eaton has said this is one of his major goals.
And, while the Big Three appear to be back on the road to success, they also know their industry is highly cyclical. Though some of the recent gains are due to hard-won changes in productivity and quality, a significant portion can be attributed to fortuitous events, such as the surprisingly strong rise of the yen.
Much uncertainty remains. GM may break even in North America this year, but still must make many tough decisions about closing plants in the United States. The current negotiations with the United Auto Workers union could threaten the Big Three’s financial recovery. A sudden downturn in the economy could erode sales.
But most industry experts believe Detroit has emerged from its recent struggles stronger than before.
“The last few years have shown that if the chemistry is right, we can have explosive changes even in large corporations,” said the University of Michigan’s Cole. “I think the U.S. auto industry will be the model for industrial transformation elsewhere in the future.”
Technology
The downsizing that has slashed and burned its way through America’s work force over the last three years has been good for the electronics industry. Business has turned to technology to help boost productivity by putting more computing power on the desks of the workers who remain.
Meanwhile, a rough-and-tumble price war has heated up the home market for personal computers, turning these once arcane machines into household appliances.
For Intel Corp., the world’s leading maker of semiconductors, that has meant record sales--$5.9 billion in 1992 and a projected $8 billion this year.
It took nearly 10 years scrapping with Japanese rivals, but the Santa Clara company in 1992 climbed back to the top of the production heap for the chips of silicon that are the programmable brains of computers. Besting the likes of NEC, Toshiba and Hitachi, Intel became the first American company to head the list since Texas Instruments in 1984, according to Dataquest Inc., a market research firm in San Jose.
Intel has been boosting production at a number of its plants and has begun building a $1-billion facility in Rio Rancho, N.M., where it will produce both the popular 486 chip and the next-generation Pentium, which is three to five times more powerful. Other companies expanding production are Intel’s chief rival, Advanced Micro Devices, and Texas Instruments.
Given the industry’s penchant for boom-and-bust cycles, there is some concern that these firms will end up with too much capacity should the personal computer market stall after this period of hyper-growth.
“It’s a real balancing act, between having enough but not so much that in a downturn you have to lay people off or suffer losses,” said Michael C. Maibach, Intel’s director of government affairs in Washington, D.C. One key element, he said, is just-in-time production, which should help keep Intel from getting stuck with a big oversupply.
With the worldwide semiconductor market at $70 billion and growing fast, Fred Zieber, president of Pathfinder Research Inc. in San Jose, doesn’t see a problem.
“Even if the PC market flattens, you have other things supplying strength, such as workstations, telecommunications and network electronics,” he said.
The Japanese semiconductor market, on the other hand, “is doing not so well,” Zieber noted, having shrunk from 40% of the world market to less than 30% in five years.
Chip makers are benefiting from another phenomenon that is in high gear--the traveling worker’s need to power up a laptop while away from the office.
Dataquest reports that U.S. sales of notebook computers more than doubled last year, making it the fastest-growing segment of technology. For 1993, growth is expected to be significantly above 50%.
For many years, Toshiba of Japan had the leading share of that sizzling market. This year, Toshiba probably won’t make the top four, “because of the creative engineering and resurgence at Compaq Computer and IBM,” said Gerry Purdy, Dataquest’s chief analyst for mobile computing.
Both Compaq and IBM have strong entries that have cut into sales of the one-time leader, Apple Computer’s PowerBook, which last year sold more than 280,600 units.
Still untested in the marketplace is the array of new “personal digital assistants”--paperback book-size gizmos, such as Apple’s Newton MessagePad, which can convert handwriting into computer text, store messages and organize appointments.
These first-generation gadgets are expected to evolve quickly into more sophisticated machines capable of wireless communication. And Silicon Valley is developing much of the technology.
“We’re looking at a rocket going off a launch pad,” Purdy said. “The question is whether it will fly at 18,000 m.p.h. or 1,000 m.p.h.”
Heavy Industry
In August, 295 big yellow bulldozers were sent off to Russia to begin scraping the face of Siberia. It was just one sign of a long-awaited revival of the heavy equipment industry.
Caterpillar Inc., the world’s largest manufacturer of construction and earth-moving equipment, began shipping its trademark earthmovers to Russia to aid in construction of a natural gas pipeline. Cat beat out a Japanese competitor to win the $100-million contract.
The deal--financed mainly with a loan from the U.S. Export-Import Bank--is only one example of increased demand for heavy-duty goods and the improved competitiveness of U.S.-made products.
As the economic cycle begins to turn up in the United States, makers of farm and construction equipment generally are seeing sales burgeon. Construction activity is expanding; bumper crops have left farmers cash-rich.
Also, companies such as Caterpillar and Deere, the world’s largest maker of agricultural equipment, finally are reaping the benefits of cost-cutting and restructuring and are posting some of their best earnings ever.
The gains haven’t come easily.
Caterpillar, based in Peoria, Ill., saw its sales and profits tumble in the 1980s due to a strong dollar and the worldwide recession. Deere, of Moline, Ill., struggled through the same period as the farming economy turned sour.
Caterpillar expanded its model lines to include lighter equipment. It automated its factories for greater flexibility. And, with more overseas markets than ever, Cat aimed for globally competitive labor costs. That effort culminated in a bitter, five-month strike by 13,000 United Auto Workers members that dragged into last year.
Deere closed several plants and slashed inventories. To win back market share, it brought out a new line of large tractors.
Now, both Cat and Deere are able to capitalize on the economic upswing.
Cat’s sales of construction machinery and diesel engines are climbing in the United States and in promising overseas markets such as Mexico. The new Deere tractors are drawing customers and demand for Deere mowers is up.
The payoff: Cat reported earnings of $67 million in the second quarter of 1993, compared with a $64-million loss for that period a year ago. In its third fiscal quarter, Deere scored surprisingly strong earnings of $100.1 million, more than 10 times its profits a year earlier.
Changing conditions also are making for better times in the oil industry.
For years, U.S. drilling has been in decline, in part because of depressed natural gas prices. But with the shrinkage of the so-called “bubble”--the oversupply of natural gas--prices have begun to climb.
As a result, natural gas drilling has exploded, a boon to the firms that supply drilling equipment and crews for oil companies. Over the last 18 months, the number of U.S. rigs drilling for natural gas has risen 56%--an average of 390 rigs in August, up from 250 in March, 1992, according to Alan Townsend, editor of the trade publication World Gas Intelligence. (By contrast, U.S. drilling for crude oil remains depressed.)
For firms such as Halliburton Co., the Dallas engineering, energy services and construction company, this all translates into increased business and improved profits. Vice President Guy Marcus estimates that second-quarter revenues in Halliburton’s U.S. market for energy services were up 32% over a year ago. Operating income for the unit was up 64%.
Meanwhile, the drive to improve productivity and efficiency in manufacturing has helped companies that make automation systems and equipment, such as Allen-Bradley Co., a Milwaukee-based unit of Rockwell International Corp.
“Our equipment fits right in the heart of automation . . . and goes to the heart of what many manufacturers are trying to achieve,” said Don H. Davis Jr., president. Allen-Bradley sales this year are expected to reach $1.7 billion, up from $1.4 billion in 1991.
Indeed, the potential market for such systems was a prime reason that Seal Beach-based Rockwell bought the closely held business in 1985. And the struggle for competitive position is only beginning.
Said Rockwell’s chairman, Donald R. Beall: “It’s a never-ending battle.”
A Manufacturing Revival
In critical business sectors, American manufacturers have regained a competitive edge worldwide, fueling whatever recovery is evident in the U.S. economy. The charts below focus on three reviving industries--heavy equipment, computer components and autos--and onthe companies that exemplify their comeback:
HEAVY EQUIPMENT
New orders for construction, mining and material handling equipment have soared 25% since hitting bottom in the first quarter of last year. At farm machinery maker Deere & Co., quarterly profits are up more than tenfold from a year ago.
New Industry Orders
(Monthly average, in billions of dollars.)
Source: Bureau of the Census, Los Angeles Times
Deere & Co.
(Earnings, in millions of dollars.)
Source: Bloomberg Business News
COMPUTER COMPONENTS
Led by Intel, which last year became the first U.S. company since 1984 to produce the most semiconductors worldwide, American computer parts makers are enjoying the benefits of continuing technological advances. New consumer and business products mean orders for electronic components and accessories.
New Industry Orders
(Monthly average, in billions of dollars.)
Source: Bureau of the Census, Los Angeles Times
Intel Corp.
(Earnings, in millions of dollars.)
Source: Bloomberg Business News
AUTOS AND AUTO PARTS
Big Three profits have been decimated by massive provisions for retiree health benefits. And General Motors, in particular, still must go through wrenching change. But America’s carmakers are reclaiming market share at home and boosting sales worldwide, with Chrysler’s comeback the most dramatic.
Industry Shipments
(Monthly average, in billions of dollars.)
Source: Bureau of the Census, Los Angeles Times
Chrysler Corp.
(Earnings, in millions of dollars.)
1993: -$4.153 billion
Source: Bloomberg Business News
Researched by ADAM S. BAUMAN and PATRICK LEE / Los Angeles Times
